Monetary Aggregates: A User's Guide
Contents
1. No single definition of money has been universally acceptable Two approaches have been used to define money The first is to identify what financial assets are commonly used for certain purposes Analysts using this approach generally in clude as money financial assets serving 1 as a medium of exchange i e assets widely acceptable in payment for goods services and debts and 2 as a store of value A second approach to defining money is to find the groupings of financial assets the movements of which are most closely correlated with the movements of certain macroeconomic variables such as national income employment and prices Both approaches have contributed to the develop ment of the monetary aggregates constructed by the Federal Reserve A brief chronology of the evolu tion of these measures is given below In 1944 the Board of Governors of the Federal Reserve System began reporting monthly data on two types of exchange media 1 currency outside of banks and 2 demand deposits at banks i e non interest bearing deposits transferable by check or convertible into cash on demand It also reported the sum of these two The Board s expressed intent in reporting the data was to increase the informa tion available to the public on current changes in the nation s money supply In time the sum of currency outside banks and demand deposits came to be called M1 the narrowest of the Fed s monetary aggrega2. Overnight repurchase agreements Overnight Eurodollars Money market mutual fund MMF balances general purpose and broker dealer Money market deposit accounts MMD As Savings deposits Small time deposits M2 Large time deposits Term RPs Term Eurodollars MMF balances institution onty Monetary Base Currency Reserves Description of Component Source of Data on Component and Frequency Currency and coin n the hands of the nonbank public Traveiers checks issued by institutions other than banks Included in M1 because they can be used directly for purchases Checkable deposits including regular non interest bearing checking accounts NOW balances ATS balances and credit union share draft balances Overnight and continuing contract repurchase agreements RPs issued by commercial banks Included in M2 because they are generally con sidered short term investments used in man aging demand deposit balances Overnight Eurodollars issued to U S residents by foreign branches of U S banks worldwide Short term investments like RPs Often checkable but included in M2 rather than M1 because turnover rates are more like savings instruments than transactions instruments Limited check writing features and turnover rates like savings rather than transactions ac counts cause Fed to include this asset in M2 rather than M1 Passbook and telephone transfer accounts Time deposits at deposi
3. FIXED WEIGHT PRICE INDEX Index Percent 1982 100 100 150 125 80 M2 Real GNP lt Fixed Weight Index 9 100 60 75 40 50 20 25 0 1960 1965 1970 1975 1980 1985 however studies began to find that the once stable relationships between M1 growth and inflation and GNP growth were breaking down These findings led the Federal Reserve in 1982 to de emphasize M1 in its monetary policymaking process 3 Recent studies however suggest that changes due to disinfla tion and deregulation have had a smaller effect on M2 than on M1 growth and that the relationship between M2 growth and inflation has remained fairly stable 4 In his February 1989 testimony before Congress the Chairman of the Board of Governors stated that over the long haul there is a close rela tionship between money M2 and prices The Fed consistent with the view that further reductions in the growth rate of M2 are necessary to achieve long run price stability reduced its target range for M2 in both 1988 and 1989 15 Revisions to the Monetary Aggregates Major revisions to the published data on the monetary aggregates occur for four reasons First the data are revised as reporting or processing errors are discovered Second the aggregates are revised annually to incorporate benchmark changes Third the seasonally adjusted data are revised annually to incorporate new seasonal adjustment factors Finally the historical series are revised when
4. Monetary Aggregates Data Are Used The Fed s legislative mandate is to set a monetary policy con sistent with high employment stable prices and moderate long term interest rates In semiannual testimony to Congress the Chair man of the Board of Governors of the Federal Reserve System reports the targets set by the Federal Open Market Committee the Fed s monetary policy making body for growth of the monetary aggregates The Chair man also relates these targeted growth rates to forecasted rates of unemployment output growth and inflation Because of concern with the instability of the behavior of M1 the Federal Open Market Committee has not specified an M1 target range since 1986 although it has continued to set target ranges for M2 and M3 The Federal Reserve cannot directly control the quantity of money It can however control 8 The President of the Federal Reserve Bank of New York is a permanent voting member of the Federal Open Market Committee while the other eleven Federal Reserve Bank presidents share four voting memberships on a rotating basis All seven members of the Board of Governors are also permanent voting members 24 Table HI AVAILABILITY OF TIME SERIES ON MONETARY AGGREGATES AND COMPONENTS MAKING UP MONETARY AGGREGATES Weekly Averages Available Beginning Series sa nsa Aggregates M1 1 75 1 75 M2 1 81 1 81 M3 1 81 1 81 Monetary Base Board Adjusted 1 59 1 59 Unadjusted
5. of the aggregates the Board estimates missing data where detail or frequency of reporting 4 Humphrey 1987 describes the theory of deposit expansion and its history Most introductory level college money and bank ing texts provide a basic discussion of how monetary actions of the Fed affect the base and the money stock Burger 1971 goes into great detail 5 For example when the reserve requirement against business time deposits with maturities of 2 1 2 to 3 1 2 years was dropped in April 1983 the amount of reserves banks were required to hold declined by 80 million In order to prevent a corresponding increase in excess reserves the Fed concurrently withdrew this 80 million through open market operations leading to an identical decline in the monetary base The Board of Governors and the Federal Reserve Bank of St Louis then eliminated this 80 million decline in their adjusted monetary base data 6 Burger 1979 discusses the causes of the differences between the Board of Governors and St Louis monetary base estimates FEDERAL RESERVE BANK OF RICHMOND 21 Table COMPONENTS OF THE MONETARY AGGREGATES AND MONETARY BASE AND THEIR LEVELS August 1988 Billions of dollars M1 782 5 Currency 207 2 Travelers checks 7 2 Demand deposits 290 0 Other checkable deposits 278 1 M2 3032 0 M1 782 5 Overnight RPs 64 9 Overnight Eurodollars 15 8 MMF balances general purpose and broker dealer 231 2 MMDAs 517 1 Savings
6. 1 59 Monetary Base St Louis Adjusted 1 72 1 72 Unadjusted 1 72 Components of Ms Currency 1 75 1 75 Demand deposits 1 75 1 75 Other checkable deposits 1 75 1 75 Overnight RPs 1 75 Overnight Eurodollars 12 79 MMMF general purpose and broker dealer 2 80 MMMF institution only 2 80 Nonbank travelers checks 1 75 1 75 Savings deposits 1 81 1 81 Small time deposits 1 81 1 81 Large time deposits 1 81 1 81 MMDA 12 82 Term RPs 1 75 Term Eurodollars 12 79 Components of Base Reserves Board Adjusted 1 59 1 59 Unadjusted 1 59 Reserves St Louis Adjusted Currency St Louis 1 72 Monthly Averages Available Beginning sa 1 59 1 59 1 59 1 59 1 50 1 59 1 59 1 63 1 59 1 59 1 59 1 59 1 59 1 50 nsa 1 47 1 59 1 59 1 59 1 59 1 29 1 19 1 47 1 47 1 63 11 69 2 77 11 73 4 74 1 59 1 59 1 59 1 59 12 82 10 69 1 59 1 59 1 59 1 47 1 50 Sources Board of Governors of the Federal Reserve System H 6 Historical Money Stock Data March 1988 Board of Governors of the Federal Reserve System H 3 Reserves of Depository Institutions Historical Data June 1988 Banking and Monetary Statistics 1941 1970 Board of Governors of the Federal Reserve System 1976 The Federal Reserve Bank of St Louis Data from 1 47 until 12 70 can be found in Banking and Monetary Statistics 1941 1970 Board of Governors of the Federal Reserve System 1976 whil
7. 989 Federal Reserve Bulletin 75 April 1989 forthcoming Hein Scott E and Mack Ort Seasonally Adjusting Money Procedures Problems Proposals Federal Reserve Bank of St Louis Review 65 November 1983 16 24 Hetzel Robert L and Yash P Mehra The Behavior of Money Demand in the 1980s Federal Reserve Bank of Richmond June 1988 Photocopy Humphrey Thomas M The Theory of Multiple Expansion of Deposits What It Is and Whence It Came Federal Reserve Bank of Richmond Economic Review 73 March April 1987 3 11 Lawler Thomas A Seasonal Adjustment of the Money Stock Problems and Policy Implications Federal Reserve Bank of Richmond Economic Review 63 November December 1977 19 27 Lindsey David E and Henry C Wallich Monetary Policy In The New Palgrave A Dictionary of Economics edited by John Eatwell Murray Milgate and Peter Newman vol 3 London The MacMillan Press Limited 1987 pp 508 15 Loeys Jan G Market Views of Monetary Policy and Reactions to M1 Announcements Federal Reserve Bank of Phila delphia Business Review March April 1984 pp 9 17 Mehra Yash P The Forecast Performance of Alternative Models of Inflation Federal Reserve Bank of Richmond Economic Review 74 September October 1988 10 18 McCarthy F Ward Jr Basics of Fed Watching In The Handbook of Treasury Securities edited by Frank J Fabozzi Chicago Probus 1987 R
8. Funds FR 2051A Weekly Report of Assets for Selected Money Market Mutual Funds FR 20510 Report of Selected Deposits in Foreign Branches Held by U S Residents FR 2050 weekly FR 2051A FR2051C Investment Company Institute ICI gathers FR COSLA and FR 2051C for Fed covering all s FR 2900 FR 2910Q Call Reports FR 2900 FR 2910Q Call Reports FR 2416 FR 2900 FR 2910Q Call Reports Monthly Survey of Selected Deposits and Other Ac counts FR 2042 Report of Repurchase Agreements on U S Government and Federal Agency Securities FR 2090Q quarterly FR 2090A FR 2900 FR 2910Q Cal Reports FR 2416 FR 2051A FR 2051C FR 2415 FR 2090A Call Reports FR 2051A FR 2051C Weekly Report of Foreign Branch Liabilities to and Custody Holdings for U S Residents FR 2077 information from Bank of Canada and Bank of England FR 2051A FR 2051C FR 2051A FR 2051C H 4 1 FR 2900 FR 2910Q Cali Reports FR 2900 H 4 1 23 The Board of Governors publishes historical series of the monetary aggregates and many of the components making up the aggregates These series are periodically updated to reflect revisions or redefinitions of the aggregates Both the Board and the St Louis Fed produce historical series for the base Table III lists the monetary ag gregates and their component series as well as the monetary base and its component series available from the Board and St Louis How The
9. Jerry L Jordan The Monetary Base Explanation and Analytical Use Federal Reserve Bank of St Louis Review 50 August 1968 7 11 Bernanke Ben S and Alan S Blinder Credit Money and Aggregate Demand American Economic Review 78 May 1988 435 39 Board of Governors of the Federal Reserve System A Proposal for Redefining the Monetary Aggregates Federal Reserve Bulletin 65 January 1979 13 42 Banking and Monetary Statistics 1914 1941 Washington 1976 Banking and Monetary Statistics 1941 1970 Washington 1976 Implementing Monetary Policy Federal Reserve Bulletin 74 July 1988 419 29 Improving the Monetary Aggregates Report of the Advisory Committee on Monetary Statistics June 1976 Monetary Aggregates and Money Market Conditions in Open Market Policy Federal Reserve Bulletin 57 February 1971 79 95 Monetary Policy Report to the Congress Federal Reserve Bulletin 74 August 1988 517 33 Monetary Policy Report to the Congress Federal Reserve Bulletin 75 March 1989 forthcoming Money Stock Revisions Annual historical supplement to the Board of Governors of the Federal Reserve System release H 6 Money Stock Liquid Assets and Debt Measures March 1988 New Monetary and Banking Statistics Federal Reserve Bulletin 30 February 1944 134 Notes to Table 1 21 Federal Reserve Bullet
10. MONETARY AGGREGATES A USER S GUIDE John R Walter The monetary aggregates are measures of the nation s money stock The most narrowly defined monetary aggregate M1 is the sum of the dollar amounts of currency and nonbank travelers checks in circulation plus checkable deposits M2 includes M1 plus overnight repurchase agreements overnight Eurodollar deposits general purpose and broker dealer money market fund balances money market deposit accounts and savings and small time deposits M3 is the sum of M2 and large time deposits term repurchase agreements term Eurodollar deposits and balances in money market funds employed solely by institutional investors Analysts study the relationships among these monetary measures and other macroeconomic variables such as national income employment interest rates and the price level These relation ships are then used to forecast changes in economic activity interest rates and inflation The Board of Governors of the Federal Reserve System defines the aggregates and calculates and reports their values This article explains the origin and evolution of the monetary aggregates and discusses how they are prepared and released how they are used and when and why they are revised Information on the monetary base is also included How the Monetary Aggregates Evolved Over the years economists have proposed many different groupings of financial assets into something called money
11. aggregates The liquid assets measure is called L and is made up of M3 plus U S savings bonds short term Treasury securities com mercial paper and bankers acceptances The aggregate labeled Debt includes the debt of the U S government state and local governments and private nonfinancial sectors L first appeared in the Federal Reserve Bulletin in 1980 with Debt following in 1984 Items in L and Debt fall outside of the category of assets that most economists would call money The Board of Governors releases its most recent estimates of the monetary base every two weeks These figures are two week averages of daily figures for the two weeks ending eight days earlier The Board publishes a seasonally adjusted monetary base figure adjusted for changes in reserve requirements a not seasonally adjusted base figure adjusted for changes in reserve requirements and a not seasonally adjusted figure not adjusted for reserve requirement changes The St Louis Federal Reserve Bank also releases a new estimate of the average monetary base every two weeks It provides only a base figure adjusted for reserve requirement changes and for seasonal change 22 ECONOMIC REVIEW JANUARY FEBRUARY 1989 MI M2 M3 Table H SOURCES OF DATA USED BY THE BOARD OF GOVERNORS IN THE ESTIMATION OF THE MONETARY AGGREGATES AND THE MONETARY BASE Component Currency Nonbank travelers checks Demand deposits and Other checkable deposits Mi
12. aggregates throughout much of the book Monetary Statistics of the United States also by Friedman and Schwartz provides estimates of the quantity of money for the period 1867 1968 and discusses sources and methods of construction of historical money stock estimates This volume also devotes more than 100 pages to alternative ap proaches to the definition of money The Federal Reserve Bulletin and the Board of Governors Annual Report generally document and explain definitional changes in the monetary aggre gates Banking and Monetary Statistics 1941 1970 published by the Board of Governors includes a detailed discussion of the Fed s money stock measures The Monetary Base Explanation and Analytical Use by Leonall C Anderson and Jerry L Jordan in the August 1968 Federal Reserve Bank of St Louis Review explains the construction of the St Louis version of the monetary base and points out why that concept is of importance to monetary economists The Board of Governors H 3 release gives a complete definition of the Board s monetary base in its footnotes Carl M Gamb s Federal Reserve Intermediate Targets Money or the Monetary Base in the January 1980 Federal Reserve Bank of Kansas City Economic Review discusses the pros and cons of use of the monetary base in monetary control and provides a good review of the Board s and St Louis construction of the base References Anderson Leonall C and
13. arket 6th ed Richmond Federal Reserve Bank of Richmond 1986 Duprey James N How the Fed Defines and Measures Money Federal Reserve Bank of Minneapolis Quarterly Review Spring Summer 1982 pp 10 19 Federal Reserve Bank of St Louis Monetary Trends Various dates U S Financial Data Various dates Friedman Benjamin M Monetary Policy Without Quantity Variables American Economic Review 78 May 1988 440 45 Friedman Milton The Optimum Quantity of Money and Other Essays Chicago Aldine Publishing Company 1969 Friedman Milton and Anna Jacobson Schwartz 4 Monetary History of the United States 1867 1960 Princeton N J Princeton University Press 1963 Monetary Statistics of the United States Estimates Sources Methods New York National Bureau of Economic Research 1970 Gambs Carl M Federal Reserve Intermediate Targets Money or the Monetary Base Federal Reserve Bank of Kansas City Economic Review 65 January 1980 3 15 Glassman Cynthia A Data Sources Used in Constructing the U S Monetary Aggregates Paper presented at 21st Meeting of Technicians of Central Banks of the American Continent Washington Board of Governors of the Federal Reserve System Division of Research and Statistics Financial Reports Section 1984 Greenspan Alan Statement before the Committee on Banking Finance and Urban Affairs U S House of Repre sentatives February 21 1
14. deposits 433 8 Small time deposits 985 2 M3 3847 3 M2 3032 0 Large time deposits 514 7 Term RPs 121 0 Term Eurodoliars 102 4 MMF balances institution only 84 0 Monetary Base 271 2 Currency 207 2 Reserves 61 1 Sources Data for M1 M2 M3 and their components are from Board of Governors of the Federal Reserve System H 6 release Money Stock Liquid Assets and Debt Measures dated October 6 1988 Data for Monetary Base are from Board of Governors of the Federal Reserve System H 3 release Aggregate Reserves of Depository Institutions and the Monetary Base dated October 6 1988 The Currency figure shown ada Monetary Base is from H 6 while the Reserves figure is from are lacking Table II lists by component sources of data used by the Board to calculate the monetary aggregates The Board of Governors reports figures for M1 M2 and M3 each week usually on Thursday after noon at 4 30 eastern time Reported values are weekly averages of daily figures for the week ending ten days earlier The Board publishes both seasonally adjusted and not seasonally adjusted data Revisions of the seasonally adjusted aggregates can be large due to changing seasonal patterns over time 7 For a discussion of the difficulties of seasonal adjustment see Hein and Ott 1983 Explanation M2 and M3 both differ from the sums of their components because these aggregates are seasonally adjusted by adjusting the non M1 components o
15. e data for 1 59 to current are available from Board of Governors of the Federal Reserve System H 6 Historical Money Stock Data March 1988 Definitions used in these two sources differ a Weekly data are available until 2 84 after which only biweekly data are available sa Seasonally adjusted nsa Not seasonally adjusted ECONOMIC REVIEW JANUARY FEBRUARY 1989 variables that influence short term interest rates namely the quantity of reserves held by depository institutions and the monetary base and thereby in fluence the growth rate of the aggregates Greater provision of reserves through Federal Reserve open market purchases of securities tends to push down the federal funds rate and other short term interest rates Lower interest rates in turn help determine the quantities of the monetary aggregates de manded by the private sector Downward pressure on federal funds and other rates makes holding money balances which pay no or low rates of in terest less costly The lower cost of holding money increases the quantity of money demanded Assum ing money supply equals money demand the result is an increase in the level of monetary aggregates Changes in the aggregates normally are followed by temporary changes in aggregate output and employ ment and by permanent changes in prices Chart 1 illustrates the relationship between M2 and the price level As is conventional in such comparisons M2 is shown per unit of r
16. eal output i e is divided by real GNP to adjust for growth in the economy The monetary aggregates have been watched closely by those attempting to predict Fed policy moves In periods when the Fed sought tight control of the growth rate of the aggregates unusually fast or slow money growth has generated expecta tions of subsequent policy actions by the Fed to arrest or reverse these movements In such periods the financial markets react to the announcement of the weekly M1 figure The announcement of a higher than expected M1 figure for example leads market Participants to increase their estimate of the proba bility that the Fed will put upward pressure on the funds rate and other short term rates rise in reac tion to these changed expectations Many economists study the aggregates to improve their understanding of the links between monetary growth and changes in other macroeconomic vari ables Prior to the 1980s empirical studies generally found stable relationships between M1 growth and inflation and GNP growth These findings were im portant to the Fed s decision to place more emphasis on the monetary aggregates in monetary policy making during the 70s and early 80s With the finan cial deregulation and disinflation of the early 1980s See Board of Governors July 1988 pp 419 20 and Broaddus 1988 pp 45 49 10 Friedman 1969 p 177 11 Loeys 1984 12 Walter 1988 pp 222 25 M2 REAL GNP AND GNP
17. eichenstein William and J Walter Elliott A Comparison of Models of Long Term Inflationary Expectations Journal of Monetary Economics 19 May 1987 405 25 Simpson Thomas D The Redefined Monetary Aggregates Federal Reserve Bulletin February 1980 97 114 Stone Courtenay C and Jeffrey B C Olson Are the Preliminary Week to Week Fluctuations in M1 Biased Federal Reserve Bank of St Louis Review 63 December 1978 13 20 Taylor Herb What Has Happened to M1 Federal Reserve Bank of Philadelphia Business Review September October 1986 pp 3 14 3 Walter John R How to Interpret the Weekly Federal Reserve Data In The Financial Analyst s Handbook 2nd ed edited by Sumner N Levine Homewood Illinois Dow Jones Irwin 1988 28 ECONOMIC REVIEW JANUARY FEBRUARY 1989
18. ever there is a redefinition of the aggregates 13 Friedman 1988 and Bernanke and Blinder 1988 14 Hetzel and Mehra 1988 Mehra 1988 and Reichenstein and Elliott 1987 15 Greenspan April 1989 and Board of Governors March 1989 FEDERAL RESERVE BANK OF RICHMOND 25 With thousands of institutions reporting to the Federal Reserve System on a weekly basis it is im possible for the Fed to find and correct all errors before the first release of monetary aggregate data As etrors are discovered the Board revises the data Most revisions occur within the first month follow ing initial release of a figure although some can take place months later As noted above to produce estimates of the monetary aggregates the Board of Governors must estimate the deposits held in financial institutions not reporting on a weekly basis Most of these institu tions do report data on a quarterly or annual basis however When these quarterly or annual figures become available they provide points of reference or benchmarks which the Board uses to make more accurate estimates for intervening dates The Board makes these benchmark revisions to the aggregates each February The monetary aggregates are seasonally adjusted to remove those movements that tend to recur at the same time each year such as the temporary in creases in transactions balances before Christmas and before the due date for tax payments To determine the proper
19. f M2 and the non M2 components of M3 as blocks Several of these components are not reported in seasonally adjusted form while those that are have been adjusted individually Monetary Base differs from its components because the currency component the Board uses in its Monetary Base computation includes some adjustments excluded from the H 6 currency figure The Board does not publish the currency portion of Monetary Base separately Other checkable deposits are negotiable order of withdrawal NOW accounts automatic transfer service ATS accounts credit union share draft accounts and demand deposits at thrift institutions RPs repurchase agreements are loan arrangements in which the borrower sells the lender securities with an agreement to repurchase them at a future date Eurodollars are dollar denominated deposits issued to U S residents by foreign branches of U S banks worldwide MMF money market mutual funds are funds investing in money market instruments offered by investment companies MMDA money market deposit accounts are savings deposits on which only a limited number of checks can be drawn each month Savings deposits are liabilities of depository institutions that do not specify a date of withdrawal or a time period after which deposited funds may be withdrawn although depository institutions must reserve the right to require at least seven days written notice before withdrawal of savings deposits Time de
20. in 72 November 1986 A14 Reserves of Depository Institutions Annual historical supplement to the Board of Governors of the Federal Reserve System release H 3 Aggregate Reserves of Depository Institutions and the Monetary Base June 1988 69th Annual Report 1982 Washington Board of Governors 1983 The Federal Reserve System Purposes Functions 7th ed Washington Board of Governors 1984 Broaddus Alfred Aggregating the Monetary Aggregates Concepts and Issues Federal Reserve Bank of Richmond Economic Review 61 November December 1975 3 12 A Primer on the Fed Richmond Federal Reserve Bank of Richmond 1988 Broaddus Alfred and Marvin Goodfriend Base Drift and the Longer Run Growth of M1 Experience from a Decade of Monetary Targeting Federal Reserve Bank of Richmond Economic Review 70 November December 1984 3 14 Burger Albert E Alternative Measures of the Monetary Base Federal Reserve Bank of St Louis Review 61 June 1979 3 8 The Money Supply Process Belmont California Wadsworth Publishing Co Inc 1971 Cook Timothy Q The 1983 M1 Seasonal Factor Revisions An Illustration of Problems That May Arise in Using Seasonally Adjusted Data for Policy Purposes Federal Reserve Bank of Richmond Economic Review 70 March April 1984 22 33 FEDERAL RESERVE BANK OF RICHMOND 27 Cook Timothy Q and Timothy D Rowe eds Instruments of the Money M
21. ines the aggregates and discusses their construction Data Sources Used In Constructing the U S Monetary Aggregates a 1984 monograph by Cynthia Glassman of the Board of Governors of the Federal Reserve System details the sources used in the estimation of the monetary aggregates The debate among economists over the best defini tion of money is discussed in Alfred Broaddus s Aggregating the Monetary Aggregates Concepts and Issues in the Economic Review of the Federal Reserve Bank of Richmond November December 1975 The footnotes found in the Board of Governor s weekly H 6 release provide detailed definitions of the aggregates The H 6 release also describes com ponents included in each of the aggregates and reports their estimated levels over time The February 1980 Federal Reserve Bulletin article The Redefined Monetary Aggregates by Thomas Simpson describes the events and intellectual forces that led the Fed to redefine its aggregates in 1980 26 ECONOMIC REVIEW JANUARY FEBRUARY 1989 and specifies how the redefinition was accomp lished This article includes time series charts show ing the growth of the pre 1980 aggregates and the post 1980 aggregates A Monetary History of the United States 1867 1960 by Milton Friedman and Anna Schwartz pro vides a seminal discussion of how changes in growth of the money stock have affected the American economy The authors discuss and make use of the Fed s monetary
22. nts which soon become deposits When these deposits are spent and redeposited they create additional excess reserves and lead to the extension of more loans Through a multiplicative process the money supply is increased by a multiple of the Fed s original addition to the monetary base The extent to which the money stock increases upon an increase in the monetary base depends on the percentages of required and excess reserves held by depository institutions and on the public s holdings of cash relative to deposits As noted above the Board of Governors and the St Louis Federal Reserve Bank s estimates of the monetary base differ and do so in three respects First the Board and St Louis adjust the base differently to cleanse it of changes that are simply the result of changes in reserve requirements 5 Second the Board and St Louis account for vault cash differently Third they seasonally adjust their estimates differently Preparation and Release of Monetary Data The Board of Governors constructs its estimates of the monetary aggregates from information supplied by depository institutions the U S Treasury money market mutual funds New York State investment companies nonbank issuers of travelers checks and foreign central banks Some of these institutions report every week others report less frequently Some report in an abbreviated form not available to larger institutions To produce weekly and monthly estimates
23. overnors stopped reporting M1A and redesignated M1B as M1 Since then the definitions have been modified only slightly Table I shows the current magnitudes of M1 M2 and M3 Monetary Base The monetary base is composed of currency held by the public and in vaults of depository institutions plus reserves of depository institutions In 1968 the Federal Reserve Bank of St Louis began publishing figures on the monetary base In 1979 the Board of Governors of the Federal Reserve System also began publishing data on a somewhat different version of the monetary base The base can be viewed as the foundation upon which the superstructure of deposits is erected An increase in the reserves component of the base allows the system of depository institutions to expand deposits Initially an increase in reserves resulting from open market operations or loans by the Fed 1 See Board of Governors June 1976 and Board of Governors January 1979 p 24 2 MIA excluded demand deposits held by foreign commercial banks and foreign official institutions while old M1 did not 3 For a thorough discussion of RPs see Stephen A Lumpkin s article Repurchase and Reverse Repurchase Agreements in Cook and Rowe 1986 pp 65 80 leads to an increase in excess reserves that is reserves beyond the amount needed to meet reserve requirements at depository institutions These insti tutions use the excess reserves to make loans and investme
24. posits are liabilities of depository institutions payable on a specified date or after a specified period of time or notice period which in all cases may not be less than seven days following the date of deposit Term as in Term RPs and Term Eurodollars means maturities of greater than one day The Reserves component of Monetary Base is total reserves of deposi tory institutions with Federal Reserve Banks plus vault cash used to pre reserve requirements and is adjusted for reserve requirement changes For a detailed description of each of the components of M1 M2 and M3 see any recent H 6 release or footnotes to the table entitled Money Stock Liquid Assets and Debt Measures in the statistical section of a recent Federal Reserve Bulletin For a detailed description of the Reserves com ponent of Monetary Base see the footnotes to the H 3 release or footnotes to the table entitled Reserves and Borrowings Depository Institutions in the statistical section of a recent Federal Reserve Bulletin The Federal Reserve Bank of Richmond s Instruments of the Money Market includes a chapter for each of the major money market instruments including Eurodollars RPs and MMF listed above The Federal Reserve in its H 6 release and in the tables of its Federa Reserve Bulletin publishes estimates of liquid assets and total debt of non financial sectors with the monetary aggregates even though these are not con sidered monetary
25. s began to be used as exchange media but were not counted in M1 until 1980 The introduction of these new assets also coincided with what some economists interpreted as changes 20 ECONOMIC REVIEW JANUARY FEBRUARY 1989 in the relationships between the monetary aggregates and economic variables such as income employment and prices These apparent changes provided some of the Fed s motivation for modifying its definitions of the aggregates in 1980 At that time the Fed replaced its M1 definition of money with M1A and M1B M1A was equivalent to the old M1 including only currency and demand deposits M1B included all of MIA plus NOW and ATS balances at banks and thrifts credit union share draft balances and demand deposits at mutual savings banks At the same time old M2 through M5 were replaced with new measures of M2 and M3 New M2 included all of M1B and a number of other assets that are easily convertible to transaction account deposits or that can be used in transactions to a limited degree These were overnight repurchase agreements RPs issued by commercial banks and certain overnight Euro dollars held by nonbank U S residents money market mutual fund shares and savings and small denomination time deposits at all depository institu tions gt New M3 added to M2 large denomination time deposits at all depository institutions and term RPs at commercial banks and savings and loan associations In January 1982 the Board of G
26. seasonal adjustment factors to apply to a given month s or week s aggregates the Board normally uses data on the aggregates for three years before and three years after the month or week in question No later data are available for the most recently released aggregates so the Board forecasts fifteen months of the data and appends it to the actual aggregate data As time passes the estimates of the seasonal factors can be made more accurately as forecasted data are replaced by actual data and as data errors are corrected and new benchmarks become available Each February the Board re estimates the seasonal factors for the data series used in the monetary aggregates and revises the seasonally adjusted data accordingly As discussed earlier the Federal Reserve changes the definitions of its aggregates from time to time following financial market innovations and regulatory changes that affect the way money is held Some definitional changes are minor and produce only small revisions in the aggregates others such as those occurring during the early 1980s lead to major revisions When the Fed changes the definitions of the monetary aggregates it revises the historical data to be consistent over the whole period of the series For a list of the beginning dates of various series see Table II Previously published data however Lawler 1977 Hein and Ott 1983 pp 16 20 and Cook 1984 pp 22 25 may not bear the same defini
27. tes Until 1971 M1 was the only monetary aggregate for which estimates were published by the Board of Governors In that year however the Board began reporting data for two additional aggregates M2 and M3 Interest in these latter variables reflected the growing importance of the monetary aggregates in formulating monetary policy It also reflected the view among some economists that the appropriate defini tion of money should include assets capable of pro viding a temporary store of value Accordingly Mz was defined to include M1 plus savings deposits at commercial banks and time deposits at commercial banks except large negotiable certificates of deposit Similarly M3 was defined as the sum of M2 and deposits at mutual savings banks and savings and loan associations In 1975 the Board began publishing data for even broader collections of financial assets namely M4 and M5 M4 included M2 plus large negotiable certificates of deposit M5 was the sum of M3 and large negotiable certificates of deposit The decade of the 1970s witnessed the develop ment of many financial instruments Some of the new assets were close substitutes for demand deposits namely negotiable order of withdrawal NOW ac counts which are interest bearing checkable accounts savings accounts featuring automatic transfer to checking accounts ATS accounts credit union share draft accounts and money market mutual funds with checking privileges These new account
28. tions Thus when com paring data at different dates users should take care to determine that the data definitions are consistent Sources of Data Monetary aggregate data are available from many sources On each Friday The Wall Street Journal publishes a table giving the money stock data released on Thursday afternoon Historical data can be found in the Federal Reserve Bulletin in the Board of Governor s H 6 release in the Board s annual historical supplement to the H 6 Historical Money Stock Data in the Federal Reserve s Banking and Monetary Statistics 1924 1941 Banking and Monetary Statistics 1941 1970 and Annual Statistical Digest for years since 1970 Historical data on the monetary base are available directly from the St Louis Federal Reserve Bank and from the Board of Governors or in the Board s H 3 release as well as the Board s historical supple ment to the H 3 Reserves of Depository Insti tutions Historical Data Normally on Friday The Wall Street Journal publishes a table including the most recent figures on the monetary base from the H 3 release Suggestions for Further Reading Most college level money and banking texts discuss the monetary aggregates and the monetary base and their relationship to economic variables James N Duprey s How the Fed Defines and Measures Money in the Spring Summer 1982 issue of the Quarterly Review of the Federal Reserve Bank of Min neapolis exam
29. tory institutions with denominations less than 100 000 Includes RPs with denominations less than 100 000 Time deposits at depository institutions with denominations of 100 000 or more Held largely by institutions Denominations 100 000 or greater with more than one day maturity Held largely by institu tions rather than individuals More than one day maturity held largely by institutions rather than individuals Balances held by institutions rather than individuals Currency and coin in the hands of the nonbank public plus currency and coin in bank vaults not used to satisfy reserve requirements Reserves of depository institutions held with Federal Reserve Banks plus vault cash used to satisfy reserve requirements FEDERAL RESERVE BANK OF RICHMOND Consolidated Statement of Condition of All Federal Reserve Banks H 4 1 weekly vauit cash data from Report of Transaction Accounts Other Deposits and Vault Cash FR 2900 weekly and Quarterly Report of Selected Deposits Vault Cash and Reservable Liabilities FR 2910Q Report of Travelers Checks Outstanding FR 2054 monthly FR 2900 FR 2910Q Reports of Condition and Income Call Reports quarterly internal Federal Reserve float data Weekly Report of Assets and Liabilities for Large Banks FR 2416 Report of Selected Borrowings FR 2415 weekly Annual Report of Repurchase Agreements FR 2090A Weekly Report of Assets of Money Market Mutual
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